Why aren’t there negotiations on a Eurozone Social Accord?

A great imbalance is visible in the Eurozone. Wages in Southern-Europe are collectively too high in comparison with the North. This is the gist of the economic problems with the Euro. The standard solution for this kind of co-ordination problems in Northern European countries was to restore the balances in a Social Accord between politicians, employers and unions. Such a solution is now needed on the scale of the Eurozone, but the social partners have been very, very silent for years. Why isn’t this route tried? Have Europeans suddenly forgotten their traditions and solutions?

The Eurozone in its current set-up is modelled quite like the German and Dutch institutional framework. A Stability and Growth Pact was agreed on, where governments promised to keep their fiscal budgets in check, the ECB would limit itself to keep inflation low and the financial system stable. These are two of three main elements of a political-economic ordering that is known as Sozial-Marktwirtschaft in Germany and Poldermodel in the Netherlands. In the economic literature it is called ORDO-Liberalism.

The third main element in this framework is the joint responsibility of Employers and Workers in macro-economic affairs. If the intention is to keep the Eurozone alive and restart growth, then such a Eurozone Social Accord is needed.

How should such an Accord look like? Roughly a raise in wages in Northern-Europe, wage restraint and productivity increases in Southern Europe. Making the labour market more flexible in those countries helps and produces more jobs. That was the lesson of the  Dutch (Wassenaar Accords, 1980s), Scandinavian and German (Hartz IV, 2000s) experiences.

But the gap between wages that has to be created again is considerable. It probably has to run up to 20% in a few years to restore competitiveness in Southern-Europe to a reasonable level.

With a slight internal revaluation in the north a state debt below 60% of GDP becomes a manageable goal. One increases the denominator with nominal wage increases across an economy. Also budget deficits could be reduced by not raising tax franchises / tresholds too much.

A rising wage across the board in Northern Europe, however would be responded to with labour saving investments. That would bring positive results for the automation and IT-industry and machine manufacturing. A stimulus to the German economy. In countries like the Netherlands and Ireland mortgage burdens for home owners and rents will be easier to bear. Banks with large mortgage portfolios will not see their rating threatened and the currently locked-down home market will revive.

The current silence is strange, because a Eurozone Social Accord can be accomplished within the current EU-treaties. It is a far less extreme solution than giving non-elected ECB-bankers a dual mandate (both inflation and employment goals, like the Federal Reserve has), issue Eurobonds or other financial “magic wands”, while this solves the real economic question that plagues the Eurozone.

I have asked around among German and Dutch politicians and economists, why there isn’t an effort made along this approach, and I received surprising answers.

A Dutch politician pointed at the negative impact on export markets to Southern Europe, when Northern countries raise salaries. In a different way this point was already made by the Dutch Employers Association’s President Wientjes. But then as a warning against breaking up the Euro. Vanishing export markets are serious. But let’s be really serious. Anyone who today knocks on the door of an Investor with a business plan to export to Southern-Europe, would receive the kind advice to come-back later. Also continuing the current policies, would also destroy most of the sales markets in those countries, due to large unemployment and sizeable government austerity.

Some Germans pointed at inflation, but in particular to the point that they shouldn’t be expected to launch this effort, because they feared it would be perceived as a German Diktat. But they also understood that a Eurozone Social Accord enabled governments the broad support to “sell” it to their electorate.

This attitude from German offers in my view the Dutch government a chance for meaningful and productive initiative, away from the sideline in the current Merkozy dominated act. It also would be very obvious in the Dutch interest to start pushing for such a solution, because a European Social Accord would stabilise the Eurozone and offer new perspective.

However, acting on this chance requires not only a rough consensus among many in the Netherlands to try this approach (that might be feasible, my soundings went through all parties from left to right). But it requires first and foremost (diplomatic) mission work among their peer-organisations from political parties, employers and unions. In particular their peers in Germany and France and the Southern European countries.

Aren’t there any losers, except those exporters to Southern Europe? Sure, but for instance the impact on Pension funds could be reduced with complementary policy, such as removing restrictions to put a larger part of their portfolio into shares.

After the change of guard from government leaders in Southern-Europe and the agreement of stricter budget discipline, now the time seems to have come to create some breathing space for Southern European companies in Northern markets. This as a “carrot” in a rebalancing path of nominal wage rises traded for labour market and productivity enhancing reforms. This looks sufficiently targeted to be generally understood and monitored in complaince.

A welcome by-effect is that this approach would remove the wind from the sails of populist politicians from both the left and the right. It also indicates that the political centre isn’t powerless and out of policy options.

Early december, an alarmist “open letter” was written by the CEOs of the largest Dutch Multinationals to the Dutch Government to save the Eurozone.  The last time such a joint letter was written was in 1976, to warn about the destructive economic effect of “Dutch Disease”. If they are serious, they would not stop now and instead contact their peers at the European Round Table and create a negotiation delegation to explore this route with Unions. And the Unions? One should think they might consider working a bit on International Solidarity a good idea.

Or is this path suddenly impossible? In that case, Europe is in real trouble, because that implies not only a financial and economic crisis, but a social systems crisis.

Hendrik Rood is Investment Director at Stratix in The Netherlands